Australian Self-Managed Super Funds
If you are an Australian resident looking to invest in property in New Zealand (or already own property in New Zealand), you are going to need specialist advice to help you deal with tax issues on both sides of the Tasman. That said, here is a short summary of some of the key points that you should be aware of.
At GRA we routinely advise offshore investors of the implications of property investment in New Zealand. Key points that trustees of SMSFs should be aware of include:
The starting point is to acknowledge that income derived from a property that is situated in New Zealand needs to be declared as taxable income to the New Zealand IRD irrespective of where the owner is situated. That is, if the income is sourced in New Zealand it needs to be accounted for in New Zealand.
This does not necessarily mean that there will be tax to pay, however, as you are able to claim deductions for expenditure incurred in deriving the rental income. It may be that after deduction of expenses, there is minimal or no profit. If there is no profit, there is no tax to pay. If there is a loss, the loss can be carried forward and offset against future year profits.
In terms of allowable deductions, note that New Zealand tax rules do not permit depreciation claims on buildings. Further, there can be restrictions on the amount of interest able to be claimed by non-resident investors. These are known as the "thin capitalisation rules". If they apply, they can limit interest deductions to the equivalent of interest that would be payable on 60% gearing.
There is no blanket capital gains tax in New Zealand. Broadly speaking this means that if a property is bought with the intention of retaining it long term as a rental property, it gives rise to a non-taxable gain on sale (as long as it is outside the 10-year bright-line period). However, there are relatively complex rules that can see gains taxable in certain circumstances (for example where there is development or subdivision of the property).
If a profit is produced, tax is payable. How that profit is taxed then depends of the character of the investing entity. From an Australian perspective, an SMSF is regarded as a trust and it may also be regarded as a trust in New Zealand. This means that the tax rate is 33% or potentially lower if income is allocated to an individual beneficiary. However, depending on the drafting of the trust deed, it may be that the SMSF is regarded as a unit trust for New Zealand tax purposes, which then means it is taxed as a corporate entity in New Zealand. The company tax rate in New Zealand is 28%. Whilst this headline rate is obviously lower than the trust rate, there can be additional tax issues when trading through what is deemed to be a company structure.
At GRA we are well versed in advising offshore clients on the New Zealand issues that they need to be aware of and assisting them to comply with their annual tax obligations. Contact us to discuss how we can help you today.